Tax court of Cologne rules on timing of advance dividends received by majority shareholder

In a recently published decision (case reference: 7 K 783/08), the tax court of Cologne ruled on the question when an advance dividend distribution (i.e. a dividend distributed in the current year from profits of the current year) becomes subject to German income tax for the majority shareholder in a German GmbH. In the case, a shareholder resolution was taken stating that an advance dividend would be distributed but that the dividend would not fall due before a certain date in the following year.

According to German income tax principles, a dividend becomes taxable as income for a taxpayer when the dividend is at the disposal of the taxpayer. The tax court of Cologne held that in the case of a majority shareholder, the dividend must be considered as being at the disposal of the taxpayer at the time the shareholder resolution is agreed on, even if under the resolution, the dividend will become due and payable at a later time. According to the court, a majority shareholder can force an immediate cash distribution in such a case unless the articles of association of the GmbH contain a special provision governing the timing of such dividend payments.

According to the court, this should be the case even if the GmbH had to obtain an (interim) bank loan to fund the dividend payment. Moreover, the fact that the advance dividend payment may have to be refunded to the GmbH if it exceeded the actual profits of the relevant financial year of the company was not sufficient to prevent recognition of the income in the same fiscal year.

The court did not attach any importance to the fact that, according to the Income Tax Act, German withholding tax on dividends will become due only at the distribution date as agreed in the shareholder resolution because of specific exceptions in the withholding tax rules. This leads to the result that the dividend would need to be included in the shareholder’s taxable income before the withholding tax on the dividend becomes due.

An appeal has been permitted by the tax court of Cologne, although it is not yet clear whether the decision will be appealed.

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